Trade Deficit stays closer to $10bn in Jan, but INR could be the answer…

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The trade data for the month of January 2017 was announced on 15th February. Compared to the previous month of December 2016, exports were down but imports saw a sharper fall. This led to the trade deficit reducing marginally from $10.37 billion in Dec-16 to $9.85 billion in Jan-17. The data for Jan-17 also assumes significance considering that it was the first full month after the demonetization drive was withdrawn on December 31st last year. Hence the street was obviously awaiting signals that the slowdown in exports caused by the demonetization had shown signs of reviving. Ironically, the month of December 2016 was the best month for export performance in the last 18 months.

How the exports for the month of January 2017 panned out…

Merchandise exports for the month of January 2017 came in at $22.12 billion. While this represented a 4.32% growth on a YOY basis, the exports were actually lower compared to December 2016. For the month of January, the US, EU and Japan saw a smart growth in exports. All of them benefited through bouts of weakness in their currencies. While US exports grew by 2.63% and EU by 5.47%, it was Japan that saw a boom in exports with a 13.43% growth in the export figure. While the government has taken a series of measures like the “Make in India” program and easier FDI norms, the real challenge seems to be the INR, which is overvalued in Real Effective Exchange Rate (REER) terms. In fact, with the INR recently appreciating from above the 68/$ mark to around the 66.90/$ mark, the INR may have only become more expensive and exports could take a further hit from these levels. This is an issue that the export industry and the Commerce Ministry need to take up urgently with the Prime Minister.

How imports have trended for the month of January 2017…

For the month of January 2017, total merchandise imports came in at $31.965 billion. After sharply higher imports in the months of October, November and December, there was perceptible reduction in the total imports. What should be worrying the government is that the value of oil imports have gone up by over 61% at $8.15 billion compared to the year ago period. This number is important because India’s import bill and its trade deficit have traditionally been vulnerable to oil shocks due to its 80% dependence on imported oil. Since the beginning of 2016, oil prices (Brent Crude) have nearly doubled from $30/bbl to $56/bbl. Non oil imports were almost flat and that seems to be gratifying as India is not splurging on gold. The issue of gold imports is a delicate issue for the government because it is an unproductive asset but takes away precious foreign exchange. The Indian economy looks to end the year with an overall import bill of around $350 billion. That means the foreign exchange reserves are sufficient to cover 12½ months of exports. This is not only comfortable from an external rating standpoint but also comparable to other BRICS economies.

How the merchandise deficit and the services surplus add up…

There is a small caveat to begin with. Services trade is reported with a 1-month lag. That means while the merchandise trade data for January 2017 gets reported, the services data for December 2016 gets reported. While this may not permit a strict apples-to-apples comparison, it gives the broad trend with a reasonable degree of accuracy. Services exports for the month of December 2016 were at $13.81 billion while the service imports for December were at $8.30 billion. While service imports have been flat, there has been a visible growth of 3.5% in service exports. This figure had been under pressure due to the demonetization but that pressure seems to have subsided for the time being. However this services surplus is shrinking in the overall context. This leaves the Indian economy with a services trade surplus of $5.51 billion. When the service trade surplus of $5.51 billion is combined with the merchandise trade deficit of $9.85 billion, it leaves a net trade deficit of $4.34 billion. The effort must be to bring this net combined trade deficit level closer to the zero mark.

There are 4 key takeaways from the trade data…

India needs a weaker INR to boost exports. Keeping the INR strong may be conducive to capital flows and yield spreads but is imposing a huge cost on merchandise exports. A weaker rupee may serve the interests of Indian exporters much better in the current context.

Oil continues to be the X-factor in this trade data. We have seen a 61% YOY growth in oil imports and with OPEC holding prices at elevated levels, this could come back to keep the merchandise trade deficit under pressure. Oil dividends are surely looking to diminish during the year.

Non-oil imports have been flat but the government needs to be cautious to ensure that the gold imports do not come back to worsen the balance of trade. The government must be open to import curbs, if required, as it did in 2013.

Lastly, the government needs to focus on expanding services exports and get the services trade surplus higher so that the net trade deficit can come closer to the zero mark. That will be a big relief to the Indian balance of payment and for her external ratings too!

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